Poised on the cusp of a money revolution
Start-up of the week

Poised on the cusp of a money revolution

Bits of Gold is involved in the strange new world of bitcoins, the digital currency that may be the money of the future

Sign in a German shop (Photo credit: Courtesy)
Sign in a German shop (Photo credit: Courtesy)

Crowdsourcing is everywhere, including but not limited to driving, maps, investments, translations and product names. Now it’s money’s turn. The new Internet currency, the bitcoin, is seeping into the public consciousness, says an Israeli who probably knows more about the phenomenon than anyone else in the country.

Jonathan Rouach, founder of Bits of Gold, is helping Israelis do business with “Internet-mined” money that is not under the control of any central bank and has proven to be far more popular than anyone could have imagined a few years ago — so much so that Germany recognizes bitcoin as a currency that can be used in business, to pay taxes, and more. Rouach sees bitcoins as a — if not the — currency of the future. He started Bits of Gold in order to promote the bitcoin idea in Israel and elsewhere.

Termed a cryptocurrency (a completely digital and encrypted form of “money”), bitcoins started out as an “experiment,” said Rouach. “Scientists were trying to figure out how to develop an independent currency that is not dependent on a central trust authority. This is the first banking system that is not managed by a company or state.”

Modern money is generally issued by a central bank and backed either by “real” assets (gold), or by the “full faith and credit” of a government. But with bitcoin, every account holder is a central banker.

In order to trade bitcoins, you open an account using bitcoin open source software, which announces to other users that you have opened a bitcoin wallet. With a wallet, you can now acquire bitcoins either by earning them (doing work for someone and having them transfer your wages in bitcoins to your wallet), or buying them using “regular” money (via an exchange, such as Mt. Gox, which like a money changer sets a dollar/bitcoin exchange rate and trades between the currencies.

Another way to get bitcoins is to create, or “mine,” them. This is a highly complicated process that entails solving high-level math problems, requiring a great deal of computing power. When the problems are solved — and the solution is approved by the bitcoin community — new bitcoins are produced and added to the “pile.” As more people use bitcoins, the problems get more complicated, and the reward for solved problems goes down. At some point in the future (in 100 years or so), no further bitcoins will be produced, as the “production block” (the math problem chain that is used to create bitcoins) maxes out.

Jonathan Rouach (Photo credit: Courtesy)
Jonathan Rouach (Photo credit: Courtesy)

In that sense, said Rouach, bitcoins are more akin to gold than to dollars; there’s a limited supply, and it’s hard to expand that supply. “Bitcoin derives its authority and creation from users, making it a true ‘peer to peer,’ crowdsourced currency. Instead of the ledger of accounts being held by the bank or the government, it’s freely accessible to all bitcoin users. And since you don’t have to register your name with your account, it’s completely anonymous.”

Among the many advantages of a crowdsourced currency: “It’s impossible to forge a transaction,” said Rouach. Since all transactions must be approved by a majority of the community, everyone is keeping everyone else honest by keeping an eye on what they are doing.

The whole bitcoin phenomenon inspired Rouach, he said, to give up his job as an electrical engineer and start Bits of Gold, which functions as an exchange to allow individuals to trade shekels for bitcoins and vice versa.

“Before my company, if an Israeli wanted to buy bitcoins, they would use an international exchange called Mt. Gox, which establishes an exchange rate for bitcoins in dollar terms (currently, one bitcoin is worth about $130). That required transferring shekels into dollars, and then dollars into bitcoins, with all the attendant fees and exchange rate issues.” Bits of Gold offers an exchange rate in shekel terms (one bitcoin will cost you NIS 479.17).

Plenty of people are using his service, Rouach said. “There are stores in Israel, both online and offline, that accept bitcoins, and more people, both users and merchants, are joining all the time.”

Since it’s a digital currency, though, bitcoins are most welcome online, and there hundreds of sites that accept them today — including Amazon, which lets customers buy gift certificates, among other things, with the currency. “We’ve been recognized as an official money changer, and following the newly implemented rules, we can accept transaction of up to NIS 40,000,” said Rouach. “We are working to bring more businesses into the orbit of bitcoin as well.”

While some digitally savvy Israelis are using bitcoins to do business online, the majority who have bought into bitcoin are using it as an investment vehicle. “They see the progress bitcoin has made and are interested in ‘catching the wave’ as the currency becomes more popular.”

There’s a certain logic to that: While bitcoin prices have been somewhat volatile since trading began in them in 2010, the currency has clearly appreciated significantly.

Could some of these “investors” be using their bitcoin accounts to hide funds, or launder illicit gains? After all, the system is anonymous (it would take a great deal of sleuthing and computer power to link a name with a bitcoin account, studies have shown). Governments around the world have expressed concern that bitcoin could become a shelter for criminals seeking to protect earnings from illegitimate sources.

Rouach doesn’t see that as a problem. “I have been working in this areas for nearly three years, and I have yet to come across someone who is using bitcoin to shield illegal earnings, although such a use of the system is certainly possible,” he said. “That’s one reason I partnered with an attorney who is very familiar with money-laundering and exchange rate issues.”

It was Rouach, at the urging of his partner, who persuaded the government of Israel to recognized bitcoins as a form of money (although, unlike in Germany, it is not yet recognized as a currency for business transactions).

“At first the Finance Ministry saw bitcoins as a digital product, and did not impose on us the reporting requirements that are required with currency exchanges,” said Rouach. “We wanted to keep everything as transparent and kosher as possible, and they agreed with us that bitcoins are currency.”

What works in Israel will work elsewhere, Rouach is convinced, and Bits of Gold is set to open exchanges in the coming weeks in several South American countries.

“It’s much easier and faster to do an exchange transaction using your own currency, and as bitcoins become more popular, we will see more opportunities in more places,” said Rouach. “In the two and a half years that bitcoins have been on the market, they have appreciated considerably. People see the trend of where this is going, as opposed to the beatings most fiat government-issued currencies are taking. If this becomes the currency of the Internet we will be looking at a real revolution in the whole concept of money.”

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